Many investors, especially new ones, tend to focus on property rehab so they can sell and move on quickly. They tend to be wary of the “buy and hold” facet of the industry, where rehabbed properties are leased to renters, rather than sold. But by diversifying into rental properties, investors can set themselves up for the long-term and not just short-term gains. Consider these points as you decide whether the rental property market is a good fit for your strategy.
When you are looking to secure financing for a property you intend to hold and lease, you need to know there are some differences from when you bought your own home. First, you will need a larger down payment—usually 20-30% of the purchase price. Additionally, lenders expect a higher credit score. You will need to have a credit score of at least 720 for many lenders, with almost everyone requiring at least a 700.
Also, when it comes to available funds, make sure that money has been in your account for at least 60 days prior to the bank looking at your financial statements. Large deposits and withdrawals must be accounted for, and banks are meticulous when it comes to tracking the money. The more you can do to avoid any potential red flags, the better.
Before you dive into the rental market, you need a good strategy to manage your rental properties. You have two choices: manage them yourself, or contract with a property management company. If you manage them on your own, you can earn more money, but you have to be on call around the clock in case something happens that requires immediate attention. Murphy’s Law says the water heater or furnace will die at the worst possible time, and you need to be prepared to coordinate these urgent repairs very quickly.
If you choose to contract with a property management company, you can expect to lose about 10% of the monthly rent payments, but you gain peace of mind knowing someone else will be available to coordinate repairs and maintenance, freeing you to spend more time securing your next deal. Financially, you are still responsible for that property’s repair needs. But with someone else handling the coordination efforts, you can keep your business moving forward.
Regardless of whether you intend to flip properties or hold them as rentals, you need a good attorney on your team who specializes on real estate. A good attorney who knows this industry can be invaluable when it comes to working through a tough deal and ensuring a smooth closing.
For rental properties, your attorney will prepare a lease agreement that will protect you once tenants are occupying them. Bad lease agreements with vague language open you to potential legal issues if you have a dispute with a tenant. A good attorney can identify potential problem areas ahead of time and work with you to craft the language so you are protected.
Like a good attorney, a good insurance agent is an essential member of your team. When you intend to hold properties in your portfolio for lease, you need the proper homeowner’s insurance policy. Work with an agent who can walk you through the process and answer any questions you have, especially if you are new to leasing property you own. You will need a plan that covers injury to tenants and property damage. If you intend to grow your rental portfolio, you will need an agent who can find the best policy options for each property you lease out.
When you own the property for the long-term, you will need to make general repairs from time to time. And if disaster should strike, you may find you need more extensive work on occasion. Find a good general contractor now, so you have someone to call when you need work done quickly. Additionally, depending on the individual lease agreements, you may be responsible for services like:
You will be ahead of the game if you have all the necessary contracts in place. That way you don’t waste time finding someone to take care of the property at the last minute.
When it comes to managing a portfolio of rental properties, planning for the future is the name of the game. From your financial strategy, to your property management plans, you will be more successful and less stressed if you put in the time now to create a strategy for the long term.